What follows for munis as a result of the US rating action:
We anticipate some period of volatile/higher Treasury yields over the short horizon. We do not expect materially higher US borrowing costs as a result of the downgrade given that we do not expect sizable forced selling of Treasury bonds; rate movement of other sovereigns has been muted when faced with similar ratings actions; Treasuries quickly retraced their yield movements following the initial warning by the rating agencies; and the spot metrics for the US are arguably within the range for a AAA sovereign rating (see Treasuries).
We can expect S&P will downgrade all municipals backed by the US credit such as pre-refunded bonds and agency-backed municipal debt. Further, those credits with large fiscal transfer dependencies would also likely see in-kind downgrades. The rating implications are likely similar to those specified by Moody’s in their 7/13/2011 note.